House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 1 - Tax concessions for philanthropy

Outline of chapter

1.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to introduce a number of new amendments to increase flexibility for charitable funds and prescribed private funds. Schedule 1 to this Bill also makes consequential amendments to the Income Tax Assessment Act 1936 (ITAA 1936).

Context of amendments

1.2 As part of its work on philanthropy in Australia, the Prime Minister's Community Business Partnership sought public submissions on ways to encourage greater levels of giving in Australia. The 2004-05 Budget announced that the Government will implement a number of amendments identified by the Partnership to increase flexibility for charitable funds, ancillary funds and prescribed private funds and further encourage private and corporate philanthropy.

1.3 A charitable fund is a fund established to receive donations to fund charitable work. Donations to the fund are tax deductible and any income derived by the fund is exempt from income tax.

1.4 An ancillary fund is a fund established and maintained solely for the purpose of receiving tax deductible public donations and providing donations to deductible gifts recipients (DGRs) or for the establishment of DGRs.

1.5 A prescribed private fund is established by businesses, families and individuals to receive private tax deductible donations to be used for similar purposes as an ancillary fund. Prescribed private funds are listed by name in the Income Tax Assessment Regulations 1997. Ancillary funds or prescribed private funds may only distribute donations to DGRs that are not ancillary funds or prescribed private funds.

1.6 The four policy changes expand the concessions relating to the capital gains tax (CGT) provisions, distributions by charitable funds, the income tax exemption for charities and the refund of franking credits provisions.

Summary of new law

1.7 The amendments improve the operation of a number of tax concessions currently available to charitable funds, ancillary funds and prescribed private funds. The amendments will:

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remove the condition that testamentary gifts (ie gifts made under a will) of property to DGRs must be valued at greater than $5,000 before access to the CGT exemption is available

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allow charitable funds to claim income tax exemptions whether they provide money, property and benefits solely to charities based in Australia, solely to charities that are also DGRs, or to a combination of these charities

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allow prescribed private funds and ancillary funds that provide money, property and benefits solely to income tax-exempt DGRs to qualify for income tax exemptions where the Commissioner of Taxation (Commissioner) has endorsed these funds as being eligible for tax exemptions and

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allow ancillary funds and prescribed private funds that are endorsed as income tax-exempt entities to be entitled to a refund of franking credits.

Comparison of key features of new law and current law

Detailed explanation of new law

Removal of the capital gains tax threshold

1.8 Gifts or contributions to DGRs may attract an income tax deduction provided that the conditions under Division 30 of the ITAA 1997 are met. Apart from the Cultural Bequests Program, testamentary gifts are not deductible, as reflected in subsection 30-15(2).

1.9 Section 118-60 of the ITAA 1997 provides a CGT exemption for certain testamentary gifts of property to DGRs if the requirements of section 30-15 are met. Subsection 30-15(2) requires that testamentary gifts be valued at more than $5,000 by the Commissioner.

1.10 A capital gain or loss made from a testamentary gift of property will be disregarded for CGT purposes regardless of the value of the property. This effectively removes the requirement that testamentary gifts have to be valued at greater than $5,000 in order to receive CGT exemptions and hence remove any impediment that may discourage the donation of testamentary gifts. [Schedule 1, item 20, subsection 118-60(1)]

1.11 The valuation requirements for all donations made under subsection 30-15(2) remain unchanged for tax deductibility purposes.

Distributions to charitable funds

1.12 Currently, an income tax exemption applies to charitable funds that provide money, property and benefits either solely to charities that are located in Australia and pursue their purposes in Australia, or solely to charities that are DGRs. However, the law creates an inconsistency by not allowing charitable funds to obtain income tax exemptions when they provide money, property and benefits to both types of charities.

1.13 This amendment allows funds that provide money, property and benefits to both types of charities to access an income tax exemption. [Schedule 1, item 13, paragraphs 50-60(c) and (d)]

1.14 Funds covered under items 1.5A and B in the table of section 50-5 continue to be exempt from income tax if they provide money, property and benefits solely to charities that are located in Australia and pursue their purposes in Australia or solely to charities that are DGRs.

Income tax exemption for funds distributing to certain entities

1.15 Ancillary funds and prescribed private funds are funds established for the purposes of collecting gifts to provide money, property or benefits to other DGRs.

1.16 The income tax law currently only allows ancillary funds and prescribed private funds access to an income tax exemption where they are charitable funds. Charitable ancillary funds and prescribed private funds only provide money, property and benefits to DGRs that are charities or for charitable purposes in benefiting DGRs. However, not all DGRs are endorsed as charities. DGRs that are income tax exempt, but not charities, include some Government bodies such as public ambulance services and research authorities. Consequently, ancillary funds and prescribed private fund cannot access an income tax exemption where they provide money, property or benefits to those bodies.

1.17 To rectify this anomaly, this amendment will allow non-charitable ancillary funds and prescribed private funds to benefit from an income tax exemption where they provide money, property and benefits to DGRs that are income tax exempt, whether or not the DGR is a charity. [Schedule 1, item 7, section 50-20]

1.18 The special conditions covered in sections 50-52, 50-72 and 50-75 are amended to include a reference to these new types of funds. [Schedule 1, items 8 to 12, section 52; item 14, section 50-72; item 15, paragraph 50-75(3)(b)]

1.19 Prescribed private funds and ancillary funds will only be entitled to the exemption where they are endorsed by the Commissioner. This is consistent with the requirement that organisations be endorsed by the Commissioner in order to access all relevant taxation concessions. [Schedule 1, items 16 to 19, section 50-110]

Refund on franking credits

1.20 The income tax law currently allows endorsed and specifically listed DGRs and endorsed charities and charitable funds to claim a refund of franking credits on franked dividends. The vast majority of prescribed private funds already benefit from a refund of franking credits by virtue of being endorsed as an income tax-exempt charity. However, an unintended consequence of this is that non-charitable prescribed private funds are not automatically entitled to this concession.

1.21 This measure ensures that non-charitable prescribed private funds will be able to access a refund of franking credits on the same basis as charitable prescribed private funds. Non-charitable prescribed private funds endorsed under the new exemption will also be entitled to a refund of franking credits. [Schedule 1, item 21, subsection 207-115(2); item 22, paragraph 207-115(2)(a)]

Application and transitional provisions

1.22 These amendments apply to the first income year that starts after this Bill receives Royal Assent and to each later income year. [Schedule 1, item 23]

Consequential amendments

1.23 A number of consequential amendments are made to the following provisions to include references to section 50-20:

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Subparagraph 102M(b)(ii) of the ITAA 1936 - definition of 'exempt entity' [Schedule 1, item 1].

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Paragraph 121F(1)(aa) of the ITAA 1936 - definition of 'relevant exempting provisions' [Schedule 1, item 2].

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Paragraph 269B(1)(b) of the ITAA 1936 - certain exempting provisions ineffective [Schedule 1, item 3].

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Paragraph 272-90(7)(b) in Schedule 2F to the ITAA 1936 - certain tax-exempt bodies [Schedule 1, item 4].

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Section 11-5 of the ITAA 1997 - lists of classes of exempt income [Schedule 1, item 5].

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Subparagraph 43-55(1)(a)(i) of the ITAA 1997 - anti-avoidance arrangements etc with a tax-exempt entity [Schedule 1, item 6].